For the longest time, it was very common that one’s primary home would be considered their biggest asset.
Until Robert Kiyosaki came along. And while I’m sure he didn’t invent the concept that your primary home is really not an asset, he certainly popularized it. He pounds this theory hard in his popular book, Rich Dad, Poor Dad, which is one of my favorites and started me and Selenid on the real estate flywheel!
However, this is still a somewhat hotly contested topic in personal finance circles. Some will argue very strongly that it is an asset. While others will go so far as to say you shouldn’t even include your primary home in your net worth calculations.
I’ve never explicitly discussed my full beliefs on the topic. But, by reading this blog, you’d get a bit of a mixed picture. On the one hand, I don’t recommend buying a primary home as an asset. On the other hand, I do include it in my net worth calculations.
So, I think it makes sense to dig in further…
5 reasons your primary home is not an asset
And I think it makes the most sense to start on this side of the fence.
1. It takes money out of your pocket
And that is the most functional, real definition of a liability that I have come across. And a liability is the opposite of an asset. Therefore, if your primary home meets the definition of a liability, it cannot be an asset.
Obviously it’s not that simple, but you see the point. And any homeowner must agree that your home takes money out of your pocket. We all have that first experience where something breaks and we can’t call the maintenance person or landlord to fix it. We just have to do it ourselves.
There is also the Diderot effect. Once we own a home, we want to keep things inside the home that are nice. Sometimes we may even buy a home that’s a big above our price range. And we feel the need to buy nicer, more expensive “stuff” to match the home. This is another way that the house takes money out of our pockets.
Plus, we just tend to have more pride in owning a home and so tend to spend more on it in repairs and renovations. Things we could “overlook” in our rental, we just can’t overlook anymore.
2. It doesn’t produce cash flow
Your primary home does not generate cash flow. Meaning that it does not put cash into your pocket every month like an investment property does. I mention this because that is the main difference between an investment property and your residential property. There is often a misconception that any “real estate” is an investment or an asset. But that’s not the case.
The exception here would be if you are house-hacking. Meaning that you bought a multi-family home and live in one unit while you rent out the rest. If you do that, then yes, your primary home is an asset. As long as you analyze it using my criteria to make sure it cash flows before buying…
If it doesn’t put money in your pocket every month in the form of cash flow, it is not an investment/asset. Whether it is a primary home, second home, or a poorly purchased investment property.
And the reason is that…
3. Appreciation is speculation
I should be more specific…market appreciation is speculation. Some real estate investors will buy a property that they know doesn’t cash flow because they expect it to rise in market value via appreciation. This is not investing. This is speculating.
And by the same virtue, treating your primary home like an “investment” because you expect its value to rise does not make it an asset or an investment.
The market value is property’s fluctuates like the stock market. Yes, over the long term, values tend to rise. But in any given short term, the values sway spectacularly based on multiple factors including mortgage rates and the overall economy. We’ve seen this happen in the 2008 housing crash as well as more recently with the meteoric rise of values in 2020-2021ish and their continuing slump after.
Bottom line…just because your primary home can rise in value does not make it an asset.
4. You don’t really own your home
I don’t love saying this as a home “owner” myself. But do we really own our homes? No way!
We just rent them from the bank.
That’s how a mortgage works. Think about it. What happens if you miss your mortgage payments? The bank will re possess your home and you will have to move out. Say goodbye to any “equity” you thought you had in the home. That’s all gone. Because the bank now – and really always – owned it.
So, don’t kid yourself. If you have a mortgage, you (and I include myself here) don’t own your home. You rent it from the bank. And that’s ok. But it certainly is also a huge reason why your primary home is not an asset.
So, does that mean that if you own your home outright it is an asset? Kind of…maybe, but not really, because…
5. What do you have if you sell your home?
I often hear people say that they have a ton of equity in their home like that makes them wealthy. Because if you break it down, it really doesn’t. Because, what happens if you sell your home and tap, let’s say $1 million in equity?
Well, first, you’re gonna get taxed to a certain degree depending on how much equity you have. Plus you gotta pay realtor fees.
But, for the sake of argument, let’s say this is $1 million after taxes and fees. What does that make you? It makes you a person with $1 million sleeping on the street. Because you still need to buy another place to live!
And more typical than not, people upgrade their primary homes. So they tap their equity just to sink it in another, usually more expensive home that requires a mortgage on top of their down payment.
So, your home equity rarely makes you more actual wealth. And in the worst case scenario can actually lead you to take on more debt, adding an additional liability!
I really don’t mean to be a downer
But this is just the reality of the situation. In general, your primary home is just not an asset in any real sense.
It is not a wealth builder. And you should not look at it as such.
Again, I’m not saying not to buy a house. I did and you can see exactly how and why here.
Instead, look at it for what it is, more of a liability. And manage it as such. Buy within your means. Make sure you can cover the payments in your budget while still being able to meet your financial goals.
And pay it off aggressively to minimize your debt and liabilities.
However, I do believe that there is one important exception…
1 reason why your primary home is an asset
Let’s say that the sh*t really hits the fan. You find out you will lose your job. So does your partner. You have no income at all. And no immediate prospects. There are no other assets you can tap. You are facing utter ruin.
What can you do?
Well, if you have a primary home, you could sell it. And you could thus tap whatever equity you have built up in the house plus any potential equity via market appreciation upon your sale.
And then, instead of just buying a new home, you could rent modestly and use the remainder to cover expenses until you can get back on your feet.
In this worst case scenario, your primary home doesn’t work kind of like an asset. The problem is that this is a scenario that none of us ever want to find ourselves in. But it is somewhat nice to know that we have this as a back up option.
And that’s why I still include my primary home in my net worth calculations even though I don’t really this it is one!
Here are some additional posts on assets, liabilities, and growing your net worth!
- How Much Do You Need to Save for a $5 Million Nest Egg?
- How Much Is Enough Retirement Savings?
- What You Need to Know About Assets and Liabilities
- Net Worth and Wealth Are Different: Does It Matter?
What do you think? Is a primary home an asset? Why or why not? Do you include it in your net worth calculations? Let me know in the comments below!